The first time I heard about the Bat harmonic pattern, I was skeptical. Well, I was wrong.
Harmonic trading is acquiring an ever more importance in technical analysis. These patterns relying on Fibonacci trading and are used to trade inside price ranges: they works best when price behaves in an unstructured manner, moving from a structures of price to another.
What you will learn today:
- Why Bat Pattern Trading will help you to achieve big profits in forex, stocks and crypto markets;
- How to Draw the Bat Pattern;
- How to Increase Your Accuracy by Trade in the Context;
- Some Real-life examples of bullish and bearish bat from forex and crypto markets;
- A recap of what we’ve learned about Bat trading.
Why Bat Pattern Trading will help you to achieve big profits in forex, stocks and crypto markets
Bat pattern is just one among a varied set of harmonic tools (like Crab, Butterfly, Gartley or Cypher). Nevertheless, is probably the most important one, since it provides the highest risk-to-reward ratio.
This pattern was firstly discovered in 2001 by Scott Carney, the author of the book series Harmonic Trading. Since then, it’s popularity has steadily increased.
In the following paragraphs I will teach you how to find these patterns, how to draw them and how to use a successful trading strategy to exploit the bat pattern.
How to Draw the Bat Pattern
A Bat pattern is a 5 points chart formation, formed by different retracements based upon Fibonacci’s ratios and numbers. It’s a reversal pattern.
Scott Carney, suggest these basic rules for drawing this pattern:
- Point B – should be at least at the 0.382 retracement of XA but it must be less than the 0.618 level;
- C point – should be between the 0.382 and 0.886 retracement of AB;
- Point D – should be at least at 0.886 retracement of the primary XA leg.
You can notice that these rules are so specific; I like that, because using a Bat pattern can reduce the degree of subjectivity that, for example, characterise the identification of common chart patterns like triangles or wedges.
There are two version of Bat pattern, bullish and bearish:
Luckily for us, we can quickly draw any kind of harmonic pattern using the specific XABCD tool on Tradingview: I suggest you to check it out, it will save you a ton of time and it’s free!
The Potential reversal Zone (PRZ)
A Bat pattern is completed when price approach the 0.886 retracement level of XA leg. Despite this, we shouldn’t enter in the market just when price touch this validation level.
Indeed, D point is used to identify the so-called “potential reversal zone”, an area on the chart in which we might expect a change in the underlying price action.
Within this PRZ, we search for potential signs of weakness or strength that might cause price to reverse: examples about entry filters we might use are specific candlestick patterns, or smaller chart formation as you can see in the example below:
The Bat Pattern Trading Strategy: How to Identify Stop Loss and Multiple Targets
Bat pattern provide clear exit points from the market, with the aim to maximise the profits and cut the losses at the same time.
Most traders set their stop loss at the X level. Personally, I prefer to add a buffer to this threshold, in order to avoid possible losses due to an early exit.
Personally, I follow two approaches:
- X point + 1 ATR (for a manual entry);
- X point + N pips (for an automatic limit order; the number depends on the timeframe used).
Useful tips: Once price reach target 1, close half of your position and move stop loss to break-even. By this way, you will be in a risk-free trade.
Bat and harmonic patterns provide multiple targets. I like that, since it allow us to increase sensibly the risk-to-reward ratio.
Targets are set using the retracement of the AD leg:
- Target 1 – 0.382 or AD leg;
- Target 2 – 0.618 of AD leg.
Again, as seen before, I suggest you to close half of your position when you reach target 1, moving stop loss to break-even.
Trade in the Context!
Context in which a formation develops is crucial.
A bearish Bat pattern for example, works best nearby zones of resistance in the market. In an opposite way, a bullish bat works best nearby support levels.
A useful tip is to zoom out from your operating timeframe to look at the overall picture. This will help you to find the best zones of support and resistance in the market.
In the example below, I drawn a support on the 4h chart; the bearish bat pattern instead, was found on the h1 timeframe (is the same shown before).
Bullish and Bearish Bat Patterns: Some Real-life examples from forex and crypto markets
I think the best method to learn something is to put theory in practice. Look at this bullish bat on Cardano/Bitcoin cross, in cryptocurrency market:
We can see that price test the entry level twice before to actually start a reversal in the market. In this case, we can see that this trade was pain-free since it was positive for the whole trading time.
Let’s see another example, in this case a bearish Bat pattern. We are in forex market, precisely in the AUD/CAD cross.
We can see that the pattern is completed, but it hasn’t already reached target one. In this case, we had a longer period of consolidation after the completition, with a clear price retest of the 0.886 level.
Here below, I’ve included 2 more examples about a bullish and a bearish Bat pattern not already completed. I think this will be useful to understand that often you need to wait until these patterns form in the market.
In this case we have a bullish Bat pattern in development on the USD/JPY:
In this case instead, you will see a bearish bat pattern of the EUR/CAD cross, 4h chart:
Will they be validated? We don’t know, we can only expect for additional price action, taking our decisions after a possible completion of the pattern.
What you have learned today (at least I hope!)
Today we’ve discuss about the harmonic Bat, a powerful advanced chart pattern used everyday by traders to profit in forex, stocks and crypto markets.
Bat provides the best risk-to-reward ratio among the harmonic patterns; you should now understand how to identify and draw it, but also how to trade it using a consolidated trading strategy, with clear stop loss, entry and multiple targets.
In the last part of the article, we have seen some practical examples to put in practice the theory learned.
I hope you will find this content useful for you!